U.S. Equity Market Radar (May 26, 2014)
The S&P 500 Index rallied by more than one percent this week. Cyclical areas of the market bounced back sharply with technology and consumer discretion leading the way, while telecommunications and utilities were down for the week. The driver was likely the better economic news out of China, as Markit’s flash manufacturing PMI rose more than expected and hit a five-month high, boosting investors’ confidence in global growth prospects.
- The technology sector was the best performer as Google rose by more than 6 percent and Facebook wasn’t far behind. Both stocks were strong performers all week as newsflow was positive. Investors appeared to feel comfortable taking more risk this week. The entire sector had a good week with roughly 90 percent of constituents rising for the week.
- The consumer discretionary sector was also strong this week as internet retailers, broadcasting and homebuilders all posted strong performances, while some of the more traditional retailers were down for the week
- Netflix Inc. was the best performer in the S&P 500, rising 15 percent this week. The company announced an international expansion into major European countries such as Germany and France that was well received by the market. TripAdvisor also rose by about 15 percent. At a conference this week, TripAdvisor expressed enthusiasm on the strength seen in the second quarter.
- The telecommunication services sector was the worst performer this week as AT&T fell nearly 4 percent as the company announced a definitive agreement to acquire DirecTV, which had been talked about for at least two weeks.
- The utilities sector was a weak performer in a broad based selloff as the market embraced risk again.
- Petsmart Inc. was the worst performer in the S&P 500, falling 14.88 percent. The company announced quarterly results, which were disappointing along with reducing second quarter and full year expectations.
- As mentioned last week, expectations in the consumer discretionary sector may have gotten too pessimistic and after a period of underperformance over the past few months, could be potentially setting up a scenario where expectations are sufficiently low that stocks could rally as sentiment swings back to a more neutral position. Costco and Michael Kors report next week and will be key companies to watch.
- The bounce in cyclicals this week has been very encouraging and we may be finally turning the corner after a period of underperformance that began in mid-March. This bodes well for quality growth stocks with reasonable valuations.
- The S&P 500 closed at a new high and we have seen other encouraging signs that the modest correction may have run its course for the time being.
- The Russell 2000 closed above its 200-day moving average on Friday which is an encouraging sign but we can’t say we are totally out of the woods just yet.
- As earnings start to wind down, the focus will shift to macro factors and geopolitics. With a Ukrainian election over the weekend and rhetoric still high the conditions remain ripe for turmoil that may spill over into the financial markets.
- Housing stocks rallied this week but housing data remains disappointing overall. Housing is a key part of the recovery story and key indicators to watch in the upcoming week include pending home sales and the S&P/Case-Shiller Home price data.